TMFDeej (99.21)

How does a 17.6% annual return for the next three years sound?

18

Yesterday I briefly mentioned that I came across a fantastic write-up on Becton Dickinson (BDX) that the folks at East Coast Asset Management put together. Here's a link to the twelve-page report. It's definitely worth a read.

Here's a few highlights of their case for purchasing the company's stock:

- BDX will benefit from the aging baby boomer population.

- It currently trades at only 8 times EV/EBIDTA, which is significantly below its five-year average multiple of 10.1 times EV/EBIDTA.

- I love this one...BDX's dividend isn't huge (1.9%), but it has raised it for 37 consecutive years.

- The Company has posted impressive results over the past five years, including 23.5% ROIC and 22.2% ROE.

- The Company consistently repurchases its shares, with $450 worth of repurchases slated for this year.

- East Coast believes that BDX's intrinsic value is $90 to $95/share, a 35% to 40% increase from here.

I am currently long BDX in CAPS, having initiated a position in it at $77.57 in mid-April. The stock is down 13% since then, which sounds pretty bad and it is but the S&P 500 is down over 10% over that same time period. Having said that I take absolutely no solace in moral victories like outperforming a major index, but still losing money in real life. I expect BDX to handily outperform the S&P 500 over the next several years.

I own BDX as well and have done a lot of work on it. My price target is low to mid 90s as well.

A point not mentioned in the East Coast report is that BDX is several times the size of the next largest closest competitor. The scale advantage is huge - and the manufacturing has a lower labor component. BDX is really an engineering and manufacturing company. Part of compensation is tied to taking out costs.

I have done research on Chinese competitors and I am not worried about them. In fact, BDX has reverse engineered some of the Chinese products just to see if there was anything they could learn.

Another key point is that many of BDX's products are a small % of the budget of a doctor, hospital, or clinic. Also, the cost of using a poor syringe (and having an accident, for ex, however rare) is quite high.

BDX basically has no net leverage. People forget that a company without leverage reduces the risk of the cash flows in a huge, huge way. That risk should contribute to a lower discount rate.

BDX will take a while to get to low 90s. Once it gets there, I am going to reassess and see if it's something that can continue to compound at a high rate (this depends on if I can believe they can keep growing at a high rate internationally - partially a bet people globally getting a higher standard of care). If I am not convinced, I'll exit and look for another way to deploy cash.

I really like how the management team gets compensated. It's fair and aligned with shareholders.

This is a stock which will underperform if the market rises, but the value is there. There are no big immediate catalysts, but that's ok.